The market for active adult rental communities has gotten red-hot in recent years, but this type of senior housing product is still in its early stages. Two developers that have already made a name for themselves are Treplus Communities and Sparrow Partners, and their approaches to active adult development have led to growing portfolios and recently announced partnerships with industry heavyweight Welltower (NYSE: WELL).
While Treplus and Sparrow have distinct approaches to active adult, leaders with the two companies do agree on several key considerations that drive successful projects. For example, both identified suburban markets as prime opportunities to build scale and meet demand for the product, they said during the recent Senior Housing News Active Adult Virtual Summit.
Second, local governments are more receptive to active adult than other potential real estate developments. The taxes these communities generate can be used to fund a range of government departments including schools, while the resident profile in the buildings do not add any stress to a community’s existing infrastructure.
Finally, as active adult developers have become more successful and grown in scale, their network of capital providers is growing, and lenders are more receptive to underwriting projects, even as some continue to limit their exposure.
The combination of these factors can help developers in the space successfully meet development and lease-up pro formas, but there is still a lot of groundwork to be laid in order to achieve that.
Suburban markets the ‘deepest pool’
Successful active adult developers have found that suburban markets are fertile ground to develop new communities and build scale, said Jane Arthur Roslovic, managing partner at Treplus Communities.
The Columbus, Ohio-based developer has three communities in Ohio, with plans to launch new communities across the Buckeye State and other Midwestern markets. In May, Treplus and Welltower signed a deal that will give the developer the financial muscle to build scale.
Treplus targets suburban markets for its communities because the company learned that its customers either live there, or the primary influencers in considering a move – their adult children – live nearby in large, single family subdivisions.
For prospects, walkability and proximity to services such as retail and grocery stores is important in deciding to move to a Treplus community. The resident profile is active, with many preferring to walk to destinations – most do not want to drive more than five minutes for services.
“We felt that our customers very much want to stay in the community,” she said.
Sparrow also targets suburban markets for development opportunities because that is where the most unmet demand can be found, Sparrow Co-Founder and CEO Jeff Patterson said. In these geographic areas, the active adult prospect is most likely to be a renter as opposed to a buyer, aligning with the value proposition of the product type.
Additionally, a prospect’s adult children may live nearby, and proximity to retail, entertainment destinations, hospitals and medical services also play a role in the decision.
“We feel like [suburban markets] are the deepest pool,” he said.
Both Treplus and Sparrow come from traditional multifamily development backgrounds, and recognize the active adult asset class shares commonalities with multifamily, Patterson said.
He compares the decision to move into an active adult community as very similar to buying a single-family home. It is a long-term decision and commitment. This results in a slower lease timetable – the sales cycle at a Sparrow community typically averages 60 days. Once the commitment is made, however, residents often stay. Some leases average two years, and residents make the move for the opportunity for engagement and to make new friends.
“Community is is the most important thing. They don’t vocalize this a lot of times, but a lot of folks are lonely in a home, and they’re tired of caring for the home. They want engagement, they’re active, and they’re independent,” he said.
Forging community roots
Sometimes, identifying and securing a site to build a community is the easy part of the development process.
Once a site is in hand, Treplus reaches out to local government officials and other community stakeholders, educating them on the development and the benefits it will provide – and there are many benefits.
First, active adult communities are appealing to local governments because of the property taxes and other revenues they generate, which fund school systems, park districts, and other government services.
Second, the size of a building and its target consumers add little pressure to existing infrastructure. In particular, active adult communities do not notably increase traffic congestion, because of the walkability factor, residents have no children to drive back and forth to school – which also does not strain a local school district’s capabilities – and residents do not drive to far away destinations until well after rush hour, Roslovic said.
Additionally, the synergies active adult shares with multifamily apartments simplifies the learning curve for local governments.
“We’re retaining their residents, who have been in their communities for years. We aren’t putting children into their schools. That’s important,” she said.
Sparrow also immediately engages with local governments and other stakeholders on its product, and found success with many of the same arguments. The comparisons to multifamily also resonate with brokers and land sellers determining how to sell a site, and sometimes gives the firm an advantage in acquiring land, especially in tandem with educating local governments on the benefits of active adult.
“We heard from an entitlement attorney that [a local government] hasn’t approved a multifamily project in two years,” Patterson said.
Experience matters
The learning curve is narrowing as more active adult communities are built, and developers are finding less resistance to launching new developments.
For Sparrow, the difference between capitalizing its first deals and today is massive, Patterson said. The developer now has a lineup of capital partners in place, including Welltower, and closed on several loans where a capital partner had an existing relationship with a lender.
“Our experience and track record – having case studies – makes all the difference, demonstrating that we know how to [build],” he said.
Like the greater senior housing industry, Sparrow has seen the capital markets tighten a bit during Covid-19. Moreover, the company is finding more lenders with loans tied to active adult developments on their ledgers, and looking to keep exposure to the product in check.
“We’ll ask a new lender how exposed they feel to our space, and how those properties are performing, because that completely colors their approach to our specific project,” he said.
Roslovic agrees that experience is key to future success in the space, as well as a commitment to the product on the part of developers.
The marketing proposition is different from multifamily or CCRCs – Roslovic likens it as a hybrid of the two. But Treplus is building a brand. Communities are identically designed as the company grows in scale, regardless of market. Furthermore, the influx of baby boomers retiring over the next ten years almost guarantees demand for new housing, and Treplus feels it is ideally positioned to meet that need.
“When we talk to our partners and banks, we’re committed to saying, ‘This is what we do. We understand how to reach that resident, and we have the stomach for the leasing velocity at this point,” Roslovic said.
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